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Japan’s Kyushu Railway IPO chugs ahead on debut

Assessing Kyushu Railway's IPO

Japan's largest initial public offering (IPO) this year, Kyushu Railway, turned out to be just the ticket for the country's yield-starved investors, taking the fast track higher on its debut on Tuesday.

The stock jumped to as high as 3,120 yen ($29.88), or a 20 percent surge from its IPO price of 2,600 yen. It closed at 2,990 yen.

The company raised around 416 billion yen, or around $4 billion through the IPO as the government privatized part of its railway system, the first railway listing since the 1990s. JR Kyushu operates transport services on Japan's southern island of Kyushu, where Nagasaki is located.

Despite other listed railway plays tumbling this year – West Japan Railway's shares were down around 22 percent year-to-date – Kyushu Railway offered investors one key attraction: A forecasted dividend of around 75 yen, for a yield of around 3 percent. For investors such as Japan's archetypal Mrs. Watanabe, that compared favourably with the 10-year Japanese government bond yield, which was at negative 0.054 percent on Tuesday morning.

Analysts noted strong demand for yield.

Kyushu Railway is a keeper: Investor

"There's huge appetite for these assets," Peter Boardman, managing director at NWQ Investment Management, told CNBC's "The Rundown" on Tuesday. "You have to remember these are utility companies and, in Japan, the normal power utility companies have sustainable dividends. So transportation, telecoms, these are highly regarded assets by the Japanese public."

That yield was in addition to discount coupons for travel, shopping and hotels that would be offered to holders of the shares.

But he added that while most transportation companies wouldn't offer much in the way of growth, especially in demographically challenged Japan, Kyushu Railway was also a real-estate play. He noted that around 30 percent of its revenue and 50 percent of its profit came from real estate.

"Kyushu is considered the gateway to Japan. Seventy-five percent of all cruise ships that come to Japan actually stop in Kyushu. There's been a huge amount of inbound tourism coming to Kyushu from Korea and Taiwan and China, so in terms of the growth opportunities, the real estate side is actually quite attractive," he said. "Over the next three years you're going to see a lot of free cash flow being generated on the hotels and condominiums and apartment complexes that have already been invested."

The Seven Stars in Kyushu luxury train, operated by Kyushu Railway Co., stops at Hakata Station in Fukuoka, Fukuoka Prefecture, Japan, on Tuesday, Oct. 11, 2016.
Akio Kon | Bloomberg | Getty Images

Another analyst pointed to growth prospects for the company's core transportation business, on expectations of rising tourism.

"They're actually enjoying this demographic sweet spot, where you've got the baby boom generation in Japan now retiring. They do have money and they have time," Jesper Koll, CEO of WisdomTree Japan, told CNBC's "Street Signs" on Tuesday. "It's domestic travel much more so than international travel that is a big growth driver, particularly for the Kyushu region."

He didn't consider the company's planned overseas investments, which may include expanding its restaurant business, as important as the domestic operations

Koll said Kyushu Railway had reinvented itself as a premier tourist company, with "excellent" pricing and demand. "This is about as good as it gets," he said, taking a positive view on the stock, particularly the dividend yield.

What the Kyushu Railway IPO tells us about Japan's economy

Around a quarter of the IPO shares were allocated for foreign investors.

But while Kyushu Railway's dividend may be attractive to Japan's yields-starved investors, it wasn't clear how much it would interest overseas investors. One analyst noted, however, that the offering may just be too big for foreign investors to ignore.

"From a foreign investor's perspective, generally speaking, investment into Japan is not really seen as a huge yield-enhancer," Naomi Fink, CEO at Europacifica Consulting, told CNBC's "Squawk Box" on Tuesday.

But she noted that Japan's stock market was one of the world's largest.

"I think Japan remains an extremely important diversification play," she said. "From a foreign investors standpoint, you can't overlook the diversification benefits of investment into Japan and given this offer is a massive one, I would anticipate there is at least some interest from overseas investors."

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter

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